The Value of Crude Oil and Natural Gas in Our Global Economy

Crude oil and natural gas stand as two of the most vital energy sources globally, serving as the backbone of modern civilization. These naturally occurring mixtures, formed over millions of years in sedimentary rocks, result from the accumulation of sand, silt, and organic matter. Their importance is evident in the wide range of products they enable, from everyday items like electronics, cosmetics, and clothing to essential energy supplies, such as heating fuel, transportation fuel, and electricity.

The oil and gas industry is a cornerstone of the global economy, creating millions of jobs and overseeing the growth of many supporting industries, including steel, transportation, and engineering. Beyond employment, the industry's direct and indirect income streams contribute significantly to economic growth. Additionally, the royalties and taxes paid by oil and gas companies to governments worldwide improve public revenues, funding infrastructure, education, and healthcare.

Section 1: The Oil and Gas Value Chain

The oil and gas industry is vast and can be broken down into three primary components of the value chain: Upstream, Midstream, and Downstream. Each segment plays a crucial role in bringing these essential resources from deep within the Earth to the consumer.

Section 1.1: Upstream: Exploration and Production

The upstream segment is where the journey begins, covering the exploration and production (E&P) of oil and natural gas. This phase involves locating underground reserves, drilling wells, and extracting the raw materials. Companies operating in this segment often include not only E&P firms but also a range of service providers, such as rig operators, seismic and drilling contractors, and suppliers.

A critical measure of profitability in the upstream sector is the field netback, which represents the gross profit generated per barrel of oil equivalent produced. This metric is calculated by subtracting royalties, operating costs, and transportation expenses from the realized price of the oil or gas.

Section 1.2: Midstream: Transportation and Processing

Once extracted, oil and natural gas enter the midstream segment, which focuses on transportation and processing. Midstream activities include operating pipeline systems that move hydrocarbons from production sites to refineries and processing facilities. These facilities are crucial for extracting valuable by-products, such as sulfur and natural gas liquids, and for storing these end products.

In addition to pipelines, the midstream segment relies on other transportation methods, including trucks, rail, and tankers, to ensure that oil and gas products reach their intended destinations.

Section 1.3: Downstream: Refining and Distribution

The downstream segment is the final stage in the oil and gas value chain, where raw hydrocarbons are transformed into the end products we use daily. This segment includes refineries, petrochemical companies, natural gas distribution utilities, and retail fueling stations.

Refineries play a pivotal role in converting crude oil into various products, such as gasoline, jet fuel, heating oil, diesel, and propane. The range of products varies depending on the type of crude oil processed and the design and complexity of the refinery. Refiners can adjust their processes to align with seasonal demand, producing more gasoline during the summer and more heating oil in the winter.

(Source: Research Gate, RBC Capital Markets)